Having faced cuts in demand as farmers delayed buying fertilizer, the world's potash producers were hit again last year as prices tumbled. E&MJ looks at the industry today, and what the future may hold.

In a number of respects, potash is a strange commodity. With the bulk of its end use tied intimately to the fortunes of world agriculture, yet with production focused relatively tightly, producers often appear to have little room to maneuver. The impact of the global economic recession worked its way through to potash production once fertilizer application rates fell, leaving producers with high stock levels.

As Figure 1 shows, during most of the 2000s, the long-term trend in prices had been upward, only to suffer a serious reversal in 2010 when prices halved from the peaks seen in 2008 and 2009. Although there was then a gradual improvement, Uralkali's sudden withdrawal from its marketing agreement with its Belarusian counterpart in July last year dealt the industry another blow.

Meanwhile, the rising prices of the mid-2000s had already provided producers and new entrants alike with the incentive to invest in higher capacity, with billion-dollar price tags attached. In today's market scenario, some of these projects are looking less sustainable, not only in terms of the capex involved, but also in relation to projected demand trends over the next five-to-10 years. To put it bluntly, if all of the capacity currently under development or at the planning stage comes on stream, significant overcapacity will be inevitable, with the obvious effect on prices.

Yet, conversely, the fundamentals of the potash market in the long term could not be stronger. In simple terms, the world's population is growing, and as time goes by, more people will need feeding. Agriculture will need to produce more, so the market for fertilizer will inevitably grow in step. Take a long view, and potash producers will be in clover. They just have to negotiate the short and medium terms to get there.

Production: A Decade of Rises and Cutbacks

According to data from the USGS, shown in Figure 2, world potash production grew from around 25.3 million metric tons (mt) in 2000 to a peak of 36,400 million mt in 2011 before slipping back somewhat in 2012 and 2013. However, as the graph shows, the increase was by no means consistent, with periodic spurts and slips as producers reacted to the wider economic situation in general, and to agricultural demand in particular.

Agricultural demand is, of course, governed by a number of factors, including local and export markets for individual crops, the availability of financing for farmers to buy fertilizer, the weather, and the state of confidence within agriculture as a whole. When times are tough, farmers cut back on fertilizer application even though this may affect their yields, and only restore fertilizer tonnages once they can afford to do so. In the meantime, producers either have to build their own stocks or cut output, which is what has been happening recently in the...